Imagine you have been feeling unusually tired, so you visit your doctor, who performs various tests. Here is the resultant conversation:

Doctor: Based on the results of your tests, you have severe anemia. You don’t have enough healthy red blood cells.
You: What do you recommend?
Doctor: Leeches.
You: But don’t leeches remove blood. How will that help?
Doctor: If you have too many red blood cells, eventually that will cause strokes, heart attacks, embolisms, even death. Excessive red blood cells is not sustainable.
You: But I thought I had too few red blood cells, not too many. Shouldn’t I be taking iron or vitamin B-12 or something?
Doctor. Oh, no. Excessive iron eventually will cause heart attack or heart failure, diabetes mellitus, osteoporosis, hypothyroidism, and a bunch of other symptoms. And too much vitamin B-12 eventually will cause a rare form of acne. Yes, excessive iron and B-12 are not sustainable.
You: When would the adverse effects of adding iron and vitamin B-12 to my diet occur.
Doctor: It’s impossible to say.
You: So what should I do?
Doctor: Leeches.

In summary, your doctor said you have too few red blood cells, then said the usual cures — iron and B-12 — cannot be sustained and will cause many diseases, and instead suggested removing your blood cells via leeches.

Can you draw any parallels with the following excerpt, which essentially expresses the beliefs of today’s economics:

The U.S. federal budget is on an unsustainable path. In the absence of significant policy changes, federal government deficits are expected to total around $5 trillion over the next decade.

Such deficits will cause U.S. government debt, relative to GDP, to rise significantly. Thereafter, as the baby boomers increasingly reach retirement age and claim Social Security and Medicare benefits, government deficits and debt are likely to grow even more sharply.

The scale of the nation’s projected budgetary imbalances is now so large that the risk of severe adverse consequences must be taken very seriously, although it is impossible to predict when such consequences may occur.

Let’s pause to examine exactly what a federal deficit is. A federal deficit is the difference between federal tax collections and federal spending.

Thus, a federal deficit is the net number of dollars the federal government adds to the economy, aka the “private sector.”

Dollars are the lifeblood of our economy. Our economic growth is measured in dollars. Gross Domestic Product (GDP) is our usual economic measure; it is a dollar measure.

Because GDP is a dollar measure, GDP rarely can grow while the dollar supply is falling

This is what economists say, though the facts speak otherwise, as you easily can see from the above graph.

What school of thought deliberately ignores easily obtainable facts in favor of intuitive belief? No, not science. Religion.

Economics is a religion, dressed in the clothing of a science.

Under the conventional view, ongoing budget deficits decrease national saving, which reduces domestic investment and increases borrowing from abroad.

The authors make the amazing claim that adding dollars to the private sector reduces domestic investment. How giving dollars to consumers and to businesses can reduce investment, never is explained, simply because it makes no sense, whatsoever.

. . . and increases borrowing from abroad.

Obviously, adding dollars to the private sector will not cause you or your business to borrow, so we assume the authors mean the federal government will have to borrow.

But the federal government is Monetarily Sovereign. It has the unlimited ability to create brand new dollars, ad hoc, every time it pays a creditor. It never can run short of dollars, unintentionally.

Not only does the federal government (unlike state and local governments, which are monetarily non-sovereign) not need to borrow, but indeed it does not borrow.

Those T-securities (T-bonds, T-notes, T-bills) which supposedly are evidence of borrowing, actually are evidence of accepting deposits in T-security accounts — similar to bank savings accounts.

The government issues T-securities, not to obtain those dollars it can create forever, but rather to help control interest rates, to provide safe dollar investments, and to provide a basis for the dollar being the world’s reserve currency.

The article then follows with pseudo-scientific gobbledegook, which I will try to explain:

Interest rates play a key role in how the economy adjusts. The reduction in national saving raises domestic interest rates, which dampens investment and attracts capital from abroad.

The Fed, not national saving, arbitrarily controls interest rates via the Fed funds rate. Actually, it is interest rates that increase saving rather than the other way around. Capital coming in from abroad is economically stimulative — a good thing.

The external borrowing that helps to finance the budget deficit is reflected in a larger current account deficit, creating a linkage between the budget deficit and the current account deficit.

The reduction in domestic investment (which lowers productivity growth) and the increase in the current account deficit (which requires that more of the returns from the domestic capital stock accrue to foreigners) both reduce future national income, with the loss in income steadily growing over time.

But, wait. The authors express a concern about the “loss of future national income, ” meaning the economy will lose dollars.

But losing dollars is exactly what happens to the economy when the federal government runs a surplus. It is a federal deficit that adds dollars to the economy.

In short, conventional economists decry deficits that add dollars to the economy, while simultaneously decrying deficits they claim will subtract dollars from the economy.

This is science?

The authors of the article then go off on a magical mystery tour of what deficits will cause:

Substantial ongoing deficits may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy:

As traders, investors, and creditors become increasingly concerned that the government would resort to high inflation to reduce the real value of government debt.

The common, nonsense idea is that inflation makes debt easier to pay with cheaper dollars. But so-called federal “debt” consists of T-security deposits, which the government pays off by simply transferring the dollars that exist in T-security accountsback to the checking accounts of T-security holders.

Whether, at the time of redemption, a dollar is “worth” $10 or $0.01 is completely irrelevant. Existing dollars, whatever their worth, are transferred. Period.

The fiscal and current account imbalances may also cause a loss of confidence among participants in foreign exchange markets and in international credit markets, as participants in those markets become alarmed not only by the ongoing budget deficits but also by related large current account deficits.

First, to clarify the gobbledegook, there may be a loss of confidence in a certain currency, but there never is a loss of confidence in “foreign exchange markets.”

Foreign exchange rates are determined by inflation, which in turn, is determined by interest rates and by product scarcity. When a nation raises its interest rates, it increases the demand for its currency. It is said to have “strengthened its currency.”

The U.S. has the financial ability to strengthen or weaken its currency at will, or simply to determine exchange rates at will.

The increase of interest rates, depreciation of the exchange rate, and decline in confidence can reduce stock prices and household wealth, raise the costs of financing to business, and reduce private-sector domestic spending.

Apparently, there are different levels of gobbledegook, because this last paragraph has reached a higher level yet.

“The increase of interest rates” and the “depreciation of the exchange rate” are exact opposites. The effect of increasing interest rates is to increase exchange rates. It’s like saying that increases of demand reduce prices. Total nonsense.

An increase in rates can reduce stock prices, but this does not “reduce household wealth.” Average household wealth is more associated with the total money supply (which is increased by federal deficits), and by the Gap between the rich and the rest(which is narrowed by deficit spending, especially on social programs.)

Incredibly, subsequent paragraphs exceed prevous gobbledegook standards. Here are a few of the “Henny Penny, the sky is falling” excerpts:

The disruptions to financial markets may impede the intermediation between lenders and borrowers

. . . asymmetries in the political difficulty of revenue increases and spending reductions

Oh, the list of problems goes on and on, and yet even a modest bit of scientific research shows these problems absolutely do not happen. How can we be so sure?

History.

Back in 1940, when the Henny Penny’s claimed the federal debt was a “ticking time bomb,“the debt was $40 Billion. And every year thereafter, authors of “learned,” scientific, economics publications have used the “ticking time bomb” example or something similar, to “prove” the federal debt and deficit are “unsustainable.

Today, the federal debt has grown to $14 TRILLION, and we still are sustaining. The ticking time bomb still is ticking, and economists, having learned nothing, still write the same ridiculous articles.

Science changes because of discoveries. Read almost any science book from 100 years ago, and you will find it substantially out of date. And 100 years from now, today’s science books will be obsolete.

What does not change? Religion. The Torah, the Christian Bible, the Koran, all remain quite similar to what they were 100 years ago or 1000 years ago, with only the most minor of linguistic adjustments.

While science is based on evidence, religion is based on belief.

And that is why economics, as currently practiced, is a religion, or at best, a failed science, akin to astrology, phrenology, creationism, homeopathy and a tin foil hat.

Sadly, today, tomorrow, and in the future, you will continue to read the same anti-science about the federal debt. The religious are a stubborn people.

•Progressives think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Historically, whenever dollars have been taken from our economy, or even when dollar growth has been reduced, the economy has gone into recession or depression. (See: Cause of recessions and depressions)

Congress and the President insist the federal deficit must be reduced. There are but two methods for reducing the deficit: Increase federal taxes and/or reduce federal spending. Both methods reduce the number of dollars in the U.S. economy.

7/29/11: Roya Wolverson, Time Magazine: “The bad news just keeps coming. The U.S. economy grew even less than expected in the second quarter, at a rate of 1.3%, down from what many economists predicted would be 1.8% or higher. The reasons for the continued lackluster performance haven’t changed. Consumers, squeezed by higher gas and other prices, are buying less of everything from electronics to meals out to new furniture.”

Recently, I posted, “Based on where Obama and the Tea/Republicans are headed, there will be a depression (not just a recession) next year. Only a miracle of realization, by both parties, can save us now. (See: Depression in 2012)

7/30/11: Alan Rappeport, Pharmaceuticals Magazine: “Merck, the US drug company, will cut as many as 13,000 jobs, or 13 per cent of its workforce, as it looks to slash costs and invest in emerging markets. The cuts, to be achieved by 2015, follow those announced last year when Merck said it would reduce its staff by 17 per cent. Merck has been looking to achieve the savings it promised when it acquired Schering Plough for $41bn in 2009.”

Congress and the President remain ignorant. They continue to call for increased taxes and/or spending cuts. The depression cometh.

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Welcome to the United States of Lemming.

Like the proverbial lemmings, who commit suicide by following their leaders off a cliff, our leaders take our nation off an economic cliff and we blindly follow. In the United States of Lemming, there is a myth and there are facts. “Everyone” believes the myth, and “no one” believes the facts.

Here is the myth. The federal deficit and debt are too high, unsustainable, a drag on our economy, a burden on our government and an impediment to economic growth.

Here are the facts:

1. Reduced deficit growth leads to recessions. Look at this graph and tell me when recessions begin and how they are ended:

That’s right. Recessions begin after a series of declines in deficit growth. Recessions end with increases in deficit spending. Now our government again plans to cause the next recession by cutting deficit spending.

The current account = money flowing out the the country. This includes imports above exports (balance of trade), interest paid and foreign aid. For the U.S., the current account almost always is negative, meaning more money flows out of the country than into the country. To keep the domestic money supply from falling, the federal government always must run a deficit.

The rest of the deficit goes to net savings. In simplest terms, net savings are your dollars minus your debt. If you have $1,000 in the bank, but owe $200, your net savings are $800. The only source of net savings is federal government deficits.Without federal deficits, there can be no net savings. This is an accounting fact.

A deficit reduction of $1 trillion = a net savings reduction of $1 trillion for the non-federal sector (you and me). With 300+ million people in America, every $3 trillion in deficit reduction causes a $10,000 loss in each person’s net savings. That’s $10,000 taken out of your pocket, an additional $10,000 taken from your spouse, and $10,000 taken from each of your children. What do you think that will do to our economy and your personal finances?

The reason is clear. Federal surplus = economic deficit. This too is an accounting identity. Federal debt is a reflection of federal deficits — the amount of money the federal government adds to the economy. For debt to be reduced, not only must deficits be reduced; they must be entirely eliminated. Federal surplus is an extreme form of deficit reduction.

Our current account already draws money from our economy. Combine that draw-down with a federal surplus, which also pulls money from our economy, and you create a massive, economic money loss. Our most recent federal surplus came at the end of the Clinton administration. Because the surplus was brief, it caused only a recession, which was cured by the Bush deficits. Had the surplus lasted longer, it would have caused a depression.

Our lemming government leads us over the economic cliff.

4. In 1971, the U.S. went off the gold standard, and became Monetarily Sovereign.. The purpose and the effect was to give the U.S. the unlimited ability to pay any bills of any size at any time.

To pay a bill, the federal government instructs a creditor’s bank to mark up the creditor’s checking account. This process erroneously is termed “printing money,” but nothing is printed.

When you and I pay a bill, money is transferred from our account to our creditors account. By contrast, when the federal government pays a bill no money is transferred. Instead, the creditor’s checking account is marked up and money is created by the payment of the government’s debt.

Because no money is transferred, no taxes or borrowing are required for the government to send these mark-up instructions. If taxes and borrowing fell to $0 or rose to $100 trillion, neither event would affect by even one penny, the federal government’s ability to pay its bills.

Despite concerns that deficits may cause inflation, historically this has not been the case. The value of money is determined by two factors: supply and demand. Inflation concerns center on increased supply. But increased demand is anti-inflationary. Demand increases when interest rates rise or when the value of goods and services increases. Both effects have been responsible for this graph, showing no relationship between federal deficits and inflation:

Deficit spending has not caused inflation. Yet, for unknown reasons, the federal plan, agreed to by virtually all media, all politicians and all old-line economists, is to cut deficits and reduce the money supply and our savings.

Our lemming government leads us over the economic cliff.

5. “Debt Outstanding Domestic Nonfinancial Sectors” is the measure of all forms of money in the nation. As you can see, this total debt growth parallels Gross Domestic Product, the most commonly used measure of economic growth.

By cutting federal deficits, the government will reduce Domestic Nonfinancial Debt which will reduce Gross Domestic Product.

The only way to stop this suicidal march is for each of us to contact the media, contact the politicians, even contact a professor you may know, and give them the facts.

Or, like the mythical lemmings, we can follow the crowd, accept our fate and jump over the recession and depression cliff.

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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There is something of a rule in problem-solving that questions beginning with “How” are to be preceded by a thorough examination of questions beginning with “Should.” President Bush II failed to do that when he asked his advisors questions like, “How do we fight a war in Iraq and Afghanistan” and “How do we arrest Saddam Hussein.” The correct questions were “Should we fight a war in Iraq and Afghanistan” and “Should we arrest Saddam Hussein.”

A football coach does not begin with “How can we increase our passing yardage?” He begins with “Should we increase our passing yardage?” A company does not begin with, “How can we increase the number of our stores?” It begins with a thorough examination of “Should we increase the number of our stores?”

Sadly, President Obama, Congress, the media and the old-line economists work feverishly to answer the question, “How can we reduce the federal deficit?” They believe a thorough examination of “Should we reduce the federal deficit?” is unnecessary. They already “know” the answer, despite massive evidence to the contrary.

When you ask the wrong question, you find the wrong answer. Congress and the President can’t agree on an answer, because the question is wrong. It’s akin to asking, “How should we sail a ship without falling off the edge of the world?”

The correct question is, “Should we reduce the federal deficit?” Many people give perfunctory, knee-jerk answers, such as, “The deficit is not sustainable” or “Our children will pay for it.” But no answers have been based on the one, overriding, undeniable fact:

Federal deficits = net non-federal saving

Cut deficits and you cut saving. Cut saving and you cut economic growth. Cut economic growth and you enter recessions and depressions and the unemployment that accompanies them. The facts are that simple and undeniable. But, the President and members of Congress do not work from facts; they work from what each believes is common sense.

Common sense consists of beliefs most people consider obvious and sound, things “everyone knows.” Yet, your common sense may be different from my common sense, because it is affected by our different personal experiences, as well as by analogy, religion, social mores, history, logic, teaching, folklore, aphorisms, leaders and every form of information transfer, all of which vary from person to person.

The earth must be flat, not round, else the oceans would pour out. Nothing can be in two places at the same time – except in Quantum Mechanics. Running fast does not make your watch run slower – except in Relativity. If a roulette wheel lands on red five times in a row, it is more likely to land on black the next spin. Common sense.

Because common sense does not require research, it allows for fast decisions and is powerfully built into our genes. We have great difficulty departing from our common sense beliefs, because they are evolutionarily valuable. We experience and use common sense every day of our lives. We do not need research to tell us to avoid walking blindly into a street or reaching into a fire. Anyone who intentionally does these things is a “fool.”

So powerful is common sense, we angrily consider all those who depart from of our visions of common sense to be fools. Here are examples of common sense for most Americans:

1. Debt is a burden on the debtor; the more debt, the greater the burden. Debtors can be forced into bankruptcy by creditors.
2. A deficit is worse than a surplus. Outgo requires income. Taxes and borrowing pay for government spending.
3. Everything has a cost and a limit. Nothing can be created from nothing. Nothing goes on forever. There is no such thing as a free lunch. No pain; no gain. If it sounds too good, it is.
4. The greater the supply, the less the value. “Printing” money causes inflation. You can have too much of a good thing.
5. Dollars are real and scarce. They can be held, stored and moved.

Every one of these common sense beliefs either is always false or often false, when applied to the U.S. federal government, because:

1. Federal debt is not a burden. Unlike state and local governments, the federal government cannot be forced into bankruptcy (except by Congress). It can service any debt of any size, any time.
2. Federal deficits stimulate the economy while surpluses cause recessions and depressions. The federal government, being Monetarily Sovereign, neither needs nor uses taxes or borrowing to pay its bills.
3. The federal government creates money by marking up the bank accounts of creditors, in a cost-free, pain-free, limit-free process. To the federal government, money is a “free lunch.”
4. Increasing the supply does reduce value, unless demand increases more. Money demand is increased by interest rates. Since we went off the gold standard, there has been no relationship between federal deficit spending and inflation.
5. Dollars have no physical reality. They are nothing more than numbers in bank accounts. Even dollar bills are not dollars; they are receipts or titles for dollars. Dollars are not scarce to the federal government.

These truths are counter to intuition, counter to common sense and counter to the beliefs of most Americans, yet they are truths, nonetheless.

Very soon, Americans will face the cold reality of recession or depression, caused by Congress’s and the President’s following their “common sense,” rather than economic fact. Federal spending for Social Security, Medicare, Medicaid, and many other vital federal services will decline. We will suffer “invisible” pain from the loss of scientific and medical research, declining infrastructure, a weaker military, poorer schools, less food and drug inspection, and worse investment protections. Our standard of living will decline. Unemployment will worsen. Destitution will increase. Our children and our grandchildren will lead meaner lives. Their futures will be impoverished.